You wouldn’t expect investment management stocks to struggle. These two did for a while, but are bouncing back with a vengeance.
It would seem counterintuitive that investment management stocks can fall out of favor with investors. After all, these firms live and breathe the capital markets and would seem to be the most attuned to how to remain attractive to investors.
However, like all companies, investment management firms are not immune to problems. If a manager’s style is out of sync with the market (perhaps it takes a value-oriented approach in a momentum-driven market), then its customers and clients shift their funds elsewhere. In recent years, actively-managed funds have lost considerable ground to low-fee index funds, so specialist managers saw their businesses weakened. And, perhaps more than nearly any other kind of company, culture plays a critical role in producing portfolio outperformance – the company leadership must strike the right balance between maintaining a performance imperative, keeping managers motivated yet allowing for intellectual independence. If the culture deteriorates even slightly, investment performance can suffer enough to send assets out the door.
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Discussed below are two investment firms that fell out of favor, yet are well on their way to recovery. Interestingly, neither of these two firms are based in New York City, Boston, San Francisco, or other major investing hubs.
Investment Management Stock #1: Artisan Partners Asset Management (APAM)
Based in Milwaukee, Wisconsin, Artisan is a boutique $175 billion investment management firm – a bit of an oxymoron as most firms with that large of an asset base typically offer a wide range of strategies. Artisan, however, builds their teams based on their finding and cultivating highly capable talent who can manage specialized strategies.
The “Artisan” name reflects their view that investing is a craft rather than an industrial process. Following its initial public offering in 2013, Artisan’s shares more than doubled by early 2014, but then slid 70% by early 2019 as investors worried about the firm’s ability to maintain its asset base, particularly as investors withdrew their money from Artisan’s core First Generation Strategies to reinvest in low-fee index funds.
However, in the past two years, the firm has seen more success with its First and Second Generation Strategies and is rolling out its promising Third Generation Strategies. In each generation, Artisan establishes and supports new groups of managers and products. And performance of nearly all of its strategies have rebounded sharply, thanks to the talent of its managers and a tailwind from the post-pandemic capital markets. The addition of capable leadership, including Jason Gottlieb (recently promoted to president) who joined from Goldman Sachs in 2016, has no doubt helped buttress the firm’s execution.
APAM shares have rebounded sharply, nearly tripling from their March 2020 lows. Yet, at a very reasonable 6.3x estimated 2021 EBITDA, the shares are not overvalued by any stretch. Also, perhaps equally appealing is the dividend policy of paying out about 80% of the cash generated every quarter, along with possible year-end special dividends. While this dividend can vary considerably, if current conditions remain in place, the recent $0.92/share quarterly implies a 7.1% dividend yield.
Investment Management Stock #2: Manning & Napier (MN)
This upstate New York investment firm, founded in 1970, oversees $20 billion of assets across a range of actively-managed equity, fixed income and alternative strategies. Manning emphasizes a value-oriented approach. The company also has an extensive wealth management segment that caters to individuals.
The firm’s shares eroded steadily starting in mid-2014 as its investment and business performance lost their edge, and by early 2019, the shares had lost 90% of their value. However, in January 2019, the company hired Marc Mayer as CEO, starting its turnaround. He brought immensely valuable industry experience, having led marketing and investing functions at firms like AllianceBernstein, Gratham Mayo and Schroders.
So far, the turnaround seems to be working well – the firm recently won praise as Barron’s Best Fund Family for 2020, and its fund inflows are showing encouraging improvements. Also, the company has acquired nearly all of the shares of its non-controlling shareholders, while also increasing the ownership by its employees (now over 20%), including the CEO who holds over 7%.
While the shares have surged over 500% since their pre-pandemic level (and 10x since their all-time low at the depths of the pandemic sell-off in March 2020), they still look undervalued at about 4.2x EBITDA and 0.6% of assets under management (AUM). A rough industry benchmark would suggest that the shares should trade for at least 1% of AUM. Also, the shares pay a small (o.5% yield) dividend.
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Do you own any investment management stocks? Tell us about them in the comments below!
Bruce has more than 25 years of value investing experience, managing institutional portfolios, mutual funds, and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company. Now he is helping his Cabot Undervalued Stocks Advisor readers find those undervalued stocks that let you buy low and sell high!Learn More >>
*Note: This post has been updated from an original version.